The Currency Hunger Games — The curious case of Japanese Yen

“七転び八起き” (Nana Korobi Ya Oki), a famous Japanese proverb that means “Fall down seven times, stand up eight”, a proverb that can be prophetic as we see the recovery of the Japanese Yen from its abysmal performance in past few years.

Let me start with a small disclaimer, I am neither an economist nor a financial expert. In fact, I am a techie turned Tech Manager, who can’t even claim to be called as a pure techie anymore, but I do love statistics, watching & reading about equity & financial markets is my hobby and I occasionally dip my toes in geopolitics and the international trade dynamics, and its impact on financial markets. It helps that I work in a bank, so usually I am surrounded with amazing people who possess far better understanding of specific topics and I get to learn from the best.

My accidental encounter with Japanese Yen came, when India became the fifth largest economy and the claims from the Indian news cycles highlighted that by 2030, India will surpass Japan as world’s 3rd largest economy. Indian Rupee had crossed 75 INR mark against USD again in 2021 and the detractors kept bringing up the point of a weak Indian Rupee and India won’t be as powerful as news media was claiming. That’s when I started observing Japanese Yen which was hovering in 100–110 band against USD at that time. No one raises that question for Japan, which is considered as a powerhouse, though in stagnation.

Post Pandemic trigger events

2021 was a very interesting year, on one side the great resignation was on it’s peak, and on the other side massive pay hikes were being given to tech talents who were willing to make a jump in 2021. These salary hikes were not just in Technology field, but many other fields too, like healthcare, residential and commercial rental space, telecom sector and many more. Online shopping had created a boom in e-commerce market too.

In the name of recovery from pandemic, companies too started giving good salaries and bonuses to encourage people to come back to offices in person. All these activities, injected a lot of cash in the markets and stimulus packages by many govts started to heat up the economies, which lead to sudden spike in inflation.

US Fed, in order to tighten the market started to increase the interest rates from Q1–2022, and went on to achieve a record high rate hike within a year. This kind of tightening was unprecedented and it sucked the cashflow from global economy almost immediately.

The side effect was felt almost immediately globally and almost all currencies in the world weakened against the USD. Many countries experienced high levels of stress in their banking systems, and some small / local banks even got shut down, e.g. Silicon Valley Bank in USA. As almost all currencies were falling, the fall of Japanese Yen was too spectacular. From the stable levels of 100–110 Yen / USD, it fell all the way to 160 Yen/USD in 2024.

Currency fall Side effects

As Japanese currency got devalued, there was a direct impact which came on its GDP numbers. What we see today as Japanese GDP is not actually the true reflection of what Japan economy is. Though today Japanese GDP stands around 4.2 Tn USD, but that is purely because of US Fed’s tightening of Rates. Before this tightening Japanese economy stood at 5.1 Tn USD and I believe in realistic terms it should be around 5.3 Tn today.

Germany overtook Japan as 3rd largest economy in 2023 during this currency slump and I see a lot of noise in Indian News cycles that India will soon be beating Japan by the end of 2024 in nominal GDP terms and will claim 4th biggest economy rank for itself.

I agree that with 6–7% regular growth in Indian economy, it is inevitable for India to cross Japan and Germany, as these two economies are growing much slower, (Japan 1.2% and Germany -0.1%) but the claim that India will surpass Japan in 2024 hinges on the assumption that Japanese Yen will remain week as it was in past few years.

Recent market movements

In past 5 years, pandemic included, there has been voices of looming recession and imminent market crash that was overdue. These calls have become sharper even more, hence some of the countries have opted for Quantitative Easing and have lowered their interest rates, pushing US Fed to consider at cutting their own rates as well in Sep-2024.

Japan which is facing deflation for many years has kept its interest rates 0% and have been one of the anomalies in the international market, decided to take matter in its own hands by hiking its rate and ditch the 0% interest rate strategy after a long time in Mar-2024 and raised it to 0.1%, later they revised this to 0.25% in Jul-2024. What triggered this move was that many international trades, options and even loans that were taken when interest rates were 0% started to get unwind in Aug, as a lot of institutions are involved in Carry trades (A carry trade involves borrowing at a low interest rate and investing in an asset that provides a higher rate of return). This created a sudden backflow of USD towards Yen and Yen gained more than 10% against USD in just 1 month.

If this trend is sustained, as there are news bits that Japan may further rise their rate if US Fed doesn’t cut their rates in Sep, this may create even more carry trades to unwind against in Yen in future. In real terms this should revise the overall GDP numbers for Japan as the currency is not as week as earlier projected, and Japan may reclaim its 3rd largest economy from Germany by end of 2024.

Some interesting facts around Indian private sector. In Jul-24 some Indian large businesses decided to secure huge amount of loans in Japanese Yen (in tune of 200 Bn JPY), and I am sure they will be happy to see their liability dipping by 10% in such short notice and must have been feeling a lot of tailwinds in their balance sheet.

Conclusion

Japanese economy is much more resilient than it gives impression of. I have a feeling that JPY may end up around 130–140 Yen / USD band as we end 2024, unless US Fed decides to cut its rates by 50 basis points. Again, that is just a hunch of an amateur, and should not be seen as a financial advice by anyone.